Politics and policy from inside Washington
The Washington consensus is that if the GOP takes at least the House, it will give Obama a political foil and give his 2012 election hopes a big boost. And, the media tell us, the GOP presidential field is weak:
Sniping from the sidelines will be potential Republican challengers to Obama in 2012. The road to the presidential proving grounds of Iowa and New Hampshire is already well-trod by more than a dozen possible Republican candidates. The group ranges from Tea Party champion Sarah Palin to former Massachusetts Governor Mitt Romney and Minnesota Governor Tim Pawlenty. Experts believe Obama would match up well against any in this group — if the economy is on the mend and the jobless rate is trending downward from its current 9.6 percent.
But political analyst John Ellis paints a different potential scenario:
What might be an alternative story line? One answer would be: increased volatility. A darker answer might be: political instability and unrest.
As a nation, we are struggling with overwhelming debt at every level of governance and across a vast swath of the electorate. There are at least (at the very least) 15 states and countless municipalities that are functionally bankrupt. The states that are bankrupt, by any real accounting, include New York, New Jersey, Massachusetts, Connecticut, Illinois, California, Nevada, Arizona, Colorado, Ohio, Wisconsin, Louisiana, Missouri, Oregon, Washington and Michigan. They can’t (literally can not) meet their pension obligations. They won’t be able to pay for their ever-rising health care costs. Education costs are eating up too much money (although this will abate somewhat as the echo boom generation matriculates) and virtually every state (and municipality) has huge bond obligations, the proceeds from which papered over previous shortfalls. Oh, and one other thing, the economies in all of those states are stagnant, at best.
Once the last infusions of stimulus money run dry, what remains is a vast desert of debt. The idea that an over-leveraged electorate can be called upon to make up the shortfall is a non-starter. They can’t pay down their own debt and municipal debt and state debt and federal debt. The math simply doesn’t work. They end up with no take home pay.
This is the real avalanche that is about to hit American democracy. The avalanche in two weeks results in Nancy Pelosi no longer being the Speaker of the House. The avalanche of debt that hits beginning in 2011 and keeps on coming will shake our political system to its foundation. That’s the avalanche that matters.
President Obama can either get ahead of this avalanche by proposing a vast restructuring of government debt and obligations while aggressively promoting a venture-based economic growth agenda or he can be consumed by the rubble. The same holds true for the next Republican presidential nominee. He or she needs to be ahead of the avalanche to survive its inevitable onslaught.
Me: Austerity won’t sell. Growth and prosperity will. Whoever gaffs that, wins.
IBD‘s great Capital Hill blog makes a good point about F&F and the midterms:
That’s more bad news for Rep. Barney Frank, D-Mass., who’s in the political fight of his life with Republican Sean Bielat. The businessman and Marine reservist has laid into Frank, now chairman of the House Financial Services Committee, for his long support of Fannie and Fannie.
The government-sponsored enterprises were a major cause of the financial crisis. With their implicit — now explicit — taxpayer guarantees, Fannie and Freddie were able to expand and leverage far more than any truly private company could, and they used that heft to plow into subprime loans.
Back at a 2003 hearing, Frank pooh-poohed Republican and regulator concerns about the size and scope of Freddie and Fannie, saying he didn’t want to emphasize “safety and soundness.” Instead, he said, “I want to roll the dice a little bit more in this situation towards subsidized housing.”
The Federal Housing Finance Agency (FHFA) today released projections of the financial performance of Fannie Mae and Freddie Mac (the Enterprises) including potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury. To date, the Enterprises have drawn $148 billion from the Treasury Department under the terms of the PSPAs. Under the three scenarios used in the projections, cumulative Enterprise draws range from $221 billion to $363 billion through 2013.
The FFHA ginned up three different underlying economic forecasts:
And then ran the numbers:
The man behind the Volcker Rule and the bank tax will soon be leaving Washington. That’s right, Obama political adviser David Axelrod is headed back to Chicago. What, you thought I meant Treasury Secretary Timothy Geithner? As for Geithner, he will more than likely be at Treasury for the duration, though in some ways he has a better skillset for the National Economic Council. Here’s a bit from my recent Reuters Breakingviews columnette on Obama’s pal:
Treasury secretaries are typically former CEOs, prominent politicos or longtime presidential pals. A career technocrat, Geithner didn’t tick any of those boxes. Instead, he was part of the crisis-response troika, along with Ben Bernanke and Hank Paulson. Effectively, Geithner was hired to be a fixer.
Nearly two years in, it’s Mission More or Less Accomplished. The St. Louis Fed’s “financial stress index” — incorporating various interest rates, yield spreads and bond indices — is currently 0.48 after hitting a peak of 5.09 in October 2008. Even the pilloried bank bailout gets better with age. (It was certainly better than outright bank nationalization). Geithner deserves considerable credit for it, especially his push for “stress tests” to be included.
But a new set of skills may be required for the next two years. Obama soon will need help from his Treasury secretary advancing a new budget agenda after his ballyhooed deficit commission issues its report in December. The job also will require pushing Beijing to trade more freely while tamping down on protectionist sentiment at home, redoubling efforts on unemployment and finely honing a tax policy.
Geithner might not be the obvious candidate for most of this modified job description. Before he got to the Fed in 2003, his education and career had been more focused on international affairs than domestic issues. And Geithner could still present political liabilities given earlier personal tax missteps and his dicey relations with Congress.
But if not Geithner, who? Wall Street bosses are still radioactive, while recruiting Clinton administration veterans could look desperate. The scarcity of obvious replacements is highlighted by the permanent presence of media mogul and New York Mayor Michael Bloomberg’s name on the Beltway circuit, despite his repeated denials of interest in the job.
Most importantly, Geithner seems still to have the full confidence of his boss. That’s probably more than enough for him to keep his spot on the team.
Me: I think Geithner has it about right on China trade, and he certainly takes the budget deficit seriously. He is even sounding better on “King Dollar, as my friend Larry Kudlow puts it. It’s really no joke that he could have comfortably been a member of John McCain’s cabinet. On tax policy, he and the rest of Team Obama have it totally wrong. Raising the U.S. tax burden in the current system is anti-growth and thus terrible for the nation’s long-run solvency.